MW This growing risk to your stock portfolio is new, volatile - and here to stay

By Fabio Natalucci

'Fragmentation' is breaking global business relationships. U.S. companies could see closed markets and higher costs.

The old order of globalization is dying. The new order of fragmented trading blocs is rising.

Global stock markets began to recover soon after President Donald Trump's "liberation day" tariff announcement in April. The S&P 500 SPX, for example, is up around 25% since it bottomed on April 8. Investors have largely downplayed the huge evolving uncertainties around trade and immigration policies, geopolitical tensions, inflation and signs of slowing U.S. growth.

It's difficult for investors to time the market and risk underperformance of broad indexes for long, even if some indicators such as gold prices and global long-term bond yields are flashing signs of concern. Unfortunately, markets historically have not been great at predicting turning points. What investors can do is to pay attention to possible regime changes that would have significant and lasting implications for risk assets and their portfolios.

Economic and financial fragmentation is one of these risks. The U.S. benefited immensely from the post-World War II global order it engineered and the rules it set - from trade to global finance to the centrality of the U.S. dollar DXY and the U.S. dollar-based global payment system. Now the U.S. is engaged in an effort to redesign that order and rewrite the rules of commerce and global finance.

Take tariffs, for example. On the surface, a risk-aware investor can tick off several reasons that tariffs are less of a concern than they were a few months ago. The U.S. has managed to avoid a retaliatory trade war with its trade partners - ultimately the U.S. has too much leverage on individual countries, including its closest allies. Importantly, inflationary pressures have been more muted than feared, at least for now. Market participants seem to assume that this set of circumstances supporting risk assets will continue, and it may well do so in the short term.

A realignment of global powers and increasingly mercantilist policies mean that private companies can become pawns in geopolitical strategy.

This sanguine view, however, ignores the risks associated with a regime change that may be underway. Consider this possible scenario: Countries not aligned with the U.S. begin to regroup along different geopolitical fault lines based on their natural advantages, such as crucial production inputs - rare-earth minerals in the case of China, and economic size, regional dominance or a large population like India.

One example is the recent meeting of the Shanghai Cooperation Organization in Tianjin - especially the significance of Chinese President Xi Jinping, Indian Prime Minister Narendra Modi and Russian President Vladimir Putin holding hands and sharing a good laugh at a time of heightened tensions with the U.S.

This isn't the first time the "Global South" has tried to play a role in the global order. For example, the Bandung Conference (also known as the Asian-African Conference), which took place in Indonesia in April 1955, brought together leaders from newly independent or developing countries in Asia and Africa. It was the first large meeting of nonaligned countries from these regions.

Today, the Global South nations have a much larger role to play because of the size of their gross domestic product, their access to crucial commodities relevant for artificial intelligence and new technologies, and their stock-market capitalizations.

New research on geoeconomics by Matteo Maggiori at Stanford University's Graduate School of Business shows how a hegemonic state in the international system uses its power within its economic network to achieve geopolitical goals. A hegemon like the U.S. or China can exert its geoeconomic power on companies and governments in its economic network by asking them to take costly actions that manipulate the world equilibrium in the hegemon's favor.

When the government is more active in the management of the economy and companies, investors are exposed to uninsurable shocks.

This is what investors have to watch for in the medium term. A realignment of global powers and increasingly mercantilist policies mean that private companies can become pawns in geopolitical strategy, with the U.S. government now effectively taxing Nvidia (NVDA) to do business in China and taking direct stakes in Intel $(INTC)$ and U.S. Steel (JP:5401). When the government is more active in the management of the economy and companies, investors are exposed to uninsurable shocks related to unpredictable government actions.

Fragmentation arising from geopolitical tensions reduces scope for international portfolio diversification and can exacerbate financial-market volatility, because foreign governments may override market signals and take steps to advance their own evolving geopolitical strategy. This is particularly relevant at a time when equity portfolios, for example, are highly concentrated. U.S. equities account for about 65% of global equity indexes, with the U.S. group of megacap tech stocks known as the Magnificent Seven alone making up more 20% of these same global indexes.

The old order of globalization is dying. The new order of fragmented trading blocs is rising. Within this new order, market signals will be at work alongside other considerations, such as national security, supply-chain priorities and geopolitical objectives. U.S. firms may be pushed out of operating in other countries or face increasing taxes abroad. They may also see rising costs as they reorganize supply chains due to tariff costs or other political issues that challenge global supply chains.

Investors should pay attention. The rules of this order are more opaque and government actions are less reliable and more intrusive, limiting the benefits of diversification and potentially weakening confidence in the U.S. as a safe destination for foreign savings. The U.S. retains a unique role in the global economic and financial order due to its economic size, its military might, the depth and liquidity of its financial markets and the lack of obvious alternatives for investors. This advantage may not last forever.

Fabio Natalucci is the CEO of the Andersen Institute for Finance & Economics.

More: As Trump pushes them away, America's trading partners find they have a friend in China

Also read: 'This is to gain control of the most powerful agency in government': A look at Bessent's essay against the Fed

-Fabio Natalucci

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

September 08, 2025 09:27 ET (13:27 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.